It’s somewhere we all hope we never find ourselves – deep in debt and running out of options. But, for tens of thousands of people, it is a reality.
Some just never get the hang of budgeting but many others find themselves juggling spiralling debt through bad luck or misfortune. Ill health, a lost job, reduced hours or the break-up of a relationship can quickly throw even the most careful budgeting off course.
For many people, there’s not one dramatic tipping point, just a slow and inevitable succumbing to the impossible balancing act between limited income and ever increasing outgoings for life’s basic building blocks – a mortgage or rent, childcare, groceries etc.
Debt used to be a catastrophe. As recently as the financial crash, Irish law provided that people declared bankrupt were left in what was termed a “purgatory” for at least 12 years. And it was an all or nothing arrangement.
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The Personal Insolvency Act which was passed in 2012 and became operational in 2013 did two things. First, the length of a bankruptcy was reduced dramatically – ending after just one year assuming you co-operate with the process, although you may still have to make payments for up to three years.
More importantly, it put in place a series of arrangements allowing people with unmanageable debt to get a fresh start without going through bankruptcy.
These are:
– a Debt Relief Notice;
– a Debt Settlement Arrangement, and;
– A Personal Insolvency Arrangement.
Debt Relief Notice
A Debt Relief Notice generally covers unsecured debt of less than €35,000. Unsecured debt covers things such as rent arrears, utility bills, credit cards, store cards and bank overdrafts or loans.
However, it will not cover mortgage debt as a mortgage will be secured on your home. That means this route will work for tenants but not homeowners.
The Debt Relief Notice is a legal document from a court saying that you cannot pay the debts listed on it. It runs for three years and while it is in force, your debtors are no longer allowed to pursue you.
If you have a Debt Relief Notice, you do not have to make any repayments on the debts unless your financial circumstances improve. If they do, you need to let the Insolvency Service of Ireland know.
You are entitled to reasonable living expenses while subject to the notice. How much this amounts to depends on your circumstances such as whether you have children and their ages, childcare costs, transport costs, rent or mortgage and insurance costs. It also includes an allowance for food and clothing and even modest savings.
At the end of the three years, the debts will be written off in full, meaning you no longer owe that money.
There is no fee involved in getting a Debt Relief Notice but you do have to engage with an “approved intermediary” to approach the cost. The Money Advice and Budgeting Service (Mabs), among others, can direct you on this.
This is a one-time only option; you cannot seek a second Debt Relief Notice.
Debt Settlement Arrangement
A Debt Settlement Arrangement is another option. As with the Debt Relief Notice, this applies only to unsecured debt but among the differences here are that you are expected to make some repayment towards your debt and it runs for up to five years, not three. And it can be extended for a further year. Precisely how long must be agreed by yourself and your creditors and will depend on your circumstances.
There are other differences. First, you will need to go through a personal insolvency practitioner to secure one and this will cost money.
There is no limit on the debt that can be covered by this arrangement as long as it is all unsecured debt – so again, no mortgage debt.
Other items not covered include things such as court-mandated family maintenance payments; court fines for criminal offences, liabilities under personal injury awards and outstanding debt under loans you secured fraudulently.
Tax debts and money owing to Department of Social Protection, apartment management companies and even Fair Deal loans can be included with the creditor’s permission – or if they at least do not object.
At least three-quarters of your outstanding debt must date back more than six months and you will need to show you won’t be able to pay it all back over the next five years.
As with the Debt Relief Notice, while it is active and you are under what is called a “supervision period”, your creditors are not allowed to take action against you to recover the money they are owed and you are allowed reasonable living expenses as above.
Unlike the Debt Relief Notice, you need a certain amount of support from your creditors – creditors accounting for at least 65 per cent of the money you owe must agree to the arrangement.
While under supervision, you will be required to make repayments towards the debt – either as a lump sum or regular payments and this will be allocated by the Insolvency Service of Ireland among your creditors. You don’t get involved in who gets what.
If your circumstances change for the better (or the worse), you need to contact the insolvency service.
At the end of the agreed term, assuming you have met the conditions agreed in the arrangement, any remaining debt covered by the agreement is written off.
Again, you can only go through this process once. The presumption is that once you get your clean start, you take care not to allow debt build up again. You will also be limited from applying if you have used one of the other arrangements listed within a certain period.
Personal Insolvency Arrangement
A Personal Insolvency Arrangement (PIA) is the last step before bankruptcy. Much of the arrangements are the same as with Debt Relief Notices and Debt Settlement Arrangements but there are key differences.
Most importantly, a PIA can cover mortgage debt. In most cases, it ensures the home cannot be repossessed by your lender.
Another defining feature is that while any outstanding unsecured debt is written off at the end of the supervision period – up to five or six years as agreed – you are still liable for repayment of restructured secured debt, such as the mortgage in line with the terms of your agreement.
That aside, many of the conditions mirror other insolvency arrangement – no contact from creditors on listed debt while in the supervision period; reasonable living expenses; notice to the Insolvency Service if your circumstances change; no previous PIA.
There is no limit to the unsecured debt a PIA can cover but secured debt must be less than €3 million. This can include mortgages on a family home or a buy-to-let as well as any personal guarantees or business loans.
Importantly, you must have co-operated with your lender’s mortgage arrears process for at least six months before applying but you must not have agreed to an alternative repayment arrangement.
The other debts excluded under the Debt Settlement Arrangement remain outside the scope of a PIA and the position on discretionary debt is also the same.
The PIA will write off some of the unsecured debt from the outset and restructure your secured debt to make it more affordable.
You’ll need several levels of approval from creditors to secure a PIA. First, you’ll need the backing of creditors representing at least 65 per cent of the debt. That group will need to include creditors holding more than half of both secured and unsecured debt.
However, the proposal can be imposed on creditors by a court if no agreement if forthcoming.
If you are still in debt problems having gone through a Debt Settlement Arrangement of a Personal Insolvency Arrangement, and you have more than €20,000 in debt outstanding, then you can look at applying to the High Court for bankruptcy.
Act early
Of course, the best plan is to face up to your debt before it becomes unmanageable. Don’t stick your head in the sand. Unaddressed, debt will not go away and the longer you leave it – and the more you ignore creditors – the more difficult it becomes to resolve.
If you can see trouble brewing, get in touch with creditors before they have to get in touch with you. If you are someone who has a habit of relying on your credit card or “buy now, pay later” services, stop.
Before you formally engage with creditors, make sure you draw up a realistic budget governing your income and outgoings. Banks and other lenders are well aware that people can find themselves in trouble; what they really want to see is that the debtor is taking a realistic and responsible approach to the issue.
Prioritise your debt. Unsecured credit card debt – and buy now, pay later can be very expensive, much more so than personal bank or car loans, for instance.
Finally, swallow your pride and get in touch with Mabs or your local Citizens Information Service. They are specialists in helping people manage these situations and there is nothing you can tell them that they won’t have heard already. Their service is also confidential.
If you don’t know where your nearest Mabs office is you can search for it here, or call their helpline on 0818 07 2000, or ring 0818 07 4000 for information on your nearest Citizens Information Centre.
You can contact us at [email protected] with personal finance questions you would like to see us address. If you missed last week’s newsletter, you can read it here.
